🧮 What the Exit Cap Rate Reveals About Your Syndication Investment

📌 What Is an Exit Cap Rate?

The exit capitalization rate (cap rate) is the estimated rate of return a property is expected to generate at sale, based on its Net Operating Income (NOI).

It’s a simple formula:

Property Value = NOI ÷ Cap Rate

That means even a small difference in the cap rate can lead to a huge swing in projected value.

💡 Why This Number Is So Critical

Imagine a property with an NOI of $500,000:

• At a 5.00% exit cap, it’s worth $10M

• At 5.25%, it’s worth $9.52M

• At 5.50%, it’s worth $9.09M

That’s nearly a $1 million difference—just from a 0.5% shift.

🟢 What to Look for in a Cap Rate Forecast

1. Conservative Increases Over Time
Exit cap rates should generally increase by 1–2 points per year of the hold. Why? Because the value-add plan has increased NOI.

2. Anchored to Market Data
Sponsors should reference current sales comps and market forecasts when projecting exit caps.

3. Sensitivity Analysis
A well-prepared sponsor will show how returns shift under different cap rate scenarios. If they don’t include this, ask for it.

🚩 Red Flags

• Projected exit cap is equal to or higher than entry cap

• No justification provided for cap rate assumptions

• Return projections are highly sensitive to slight cap rate changes without a backup plan

🧠 Summary

Don’t overlook the exit cap rate—it’s one of the most powerful levers in a deal’s success.

Before you invest, ask:

• How is the exit cap rate determined?

• Is it lower than the entry cap?

• How do projected returns change if the cap rate shifts?

A good deal should stand strong—even if cap rates move against you.

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